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Digital Cash: The New, Lowest-Cost Payment Type

 

While many of us are accustomed to seeing a lower cash price at gas stations vs. paying with debit or credit cards, differential pricing remains the exception rather than the rule with most other U.S. merchants.  This blog explores cash as the lowest cost payment type and looks at how digital technologies may further impact this phenomenon in the future.

Setting higher prices for consumers who pay with debit or credit cards is done to defray the payment network interchange fees—which are paid by the merchant.  These interchange fees vary according to many factors, are specific to a particular country, and are regulated by central banks and/or government agencies.  Since this topic is inherently complicated, this post will focus on differential pricing within a single country, the U.S., but the major point can apply to many other countries.

 

A brief history of differential pricing in the U.S.

In 2011, Harvard Business Review wrote about the differential pricing between paying with cash and debit or credit cards in an article, entitled, “Should You Offer Different Prices for Cash and Credit?”  The author spoke for many when he stated:

If merchants start offering a 2-3% discount to pay by cash, my love affair with plastic will wane.  I won’t ditch credit cards entirely, but I’ll definitely say ‘charge it’ less frequently.   It would irk me to pay an additional 2-3% to use a credit card when paying by cash is ‘free.’   As a result, I’d patronize retailers that offer cash discounts over those with higher ‘same cash or credit’ prices.”

In 2012, U.S. merchants gained the right to impose a surcharge of up to 4% of the credit card purchase as the result of a class-action law suit settlement between retailers, Visa, MasterCard and major U.S. banks.  However, merchants are still uneasy about implementing these surcharges for fear of upsetting their customers.

Whether a U.S. merchant can today include surcharges for different payment card types remains complicated.  This Consumerist article details the U.S. states (10 of them) which do not allow differential pricing. 

That said, there are significant hidden costs of cash of which Quisk has previously written.  These costs are, unfortunately, borne disproportionately by the people that can least afford them—typically the unbanked or under-banked segments.

The ideal future payment type would be one that has the lowest cost—like cash, BUT does avoid the hidden costs of cash.  Does digital technology enable this new payment type to be created tomorrow?

 

The future opportunity:  Digital cash

Most people would agree that consumers would always like to be able to pay the lower cash price, but not be burdened by the hassles and risks of having to get and carry cash on their person.  Merchants, primarily, want more customers and secondarily prefer a payment type which would let them keep more of their hard-earned profits.

Digital cash is this new, lowest cost payment type.  And we are not talking about Bitcoin or another unregulated crypto-currency.  We are talking about a solution which digitizes the currency used within a country and which is regulated by its central bank.  This type of digital cash would be the consumer’s money from their bank, but without the cash and without the cards.

Digital cash can provide the best of both worlds for consumers—through lower prices and more convenience, and for merchants—through higher profits and happier customers.  Better and less expensive.  Now that is a winning value proposition.  Let us know what you think.

 

 

Digital Cash:  The New, Lowest-Cost Payment Type

Comments: (3)

Tom Hay
Tom Hay - Icon Solutions Ltd - London 16 January, 2015, 07:20Be the first to give this comment the thumbs up 0 likes

Given the EU regulatory interchange cap of 0.3 per cent for credit cards, and the lower of  7 euro-cents or about 0.2 per cent for debit card rates, I can't see Quisk's 'digital cash' proposition making sense this side of the Atlantic, even though PSD2 will allow merchant steering.

A Finextra member
A Finextra member 16 January, 2015, 17:02Be the first to give this comment the thumbs up 0 likes

Thanks for your comment, Tom.  Agree re: impact of interchange rates, but we are finding interest from those countries which are still very dependent on cash--and are looking for cardless and mobile solutions.  Some of these countries are on your side of the Atlantic... and further east and south.   Cheers.

Tom Hay
Tom Hay - Icon Solutions Ltd - London 16 January, 2015, 17:28Be the first to give this comment the thumbs up 0 likes

Fair comment, and I stand corrected for my sloppy geographical generalisation!